2011 Changes to Estate and Gift Taxes: What Does This Mean For Your Will and Trust?

It seems the laws regarding how the IRS will treat your estate keep changing.  Last year, as you may have heard or read, was a “good year to die” because there was no estate tax.  To be more accurate, the estate tax still existed, it was just that the “exemption amount” was unlimited.  The estate tax, as the name suggests, is the tax the IRS applies to transfers on death.  The exemption amount is the amount someone may transfer after death without paying any estate taxes.  An unlimited exemption amount means you could transfer everything; a 1 Million Dollar exemption amount means you could transfer only the first 1 Million tax-free.

Because the unlimited exemption amount was set to expire at the end of 2010, we were all scratching our heads to see what would happen for 2011.  If no new laws were passed, the exemption amount would have reverted back to 1 Million Dollars.  In December of 2010, President Obama signed the 2010 Tax Relief Act.   Because of the changes, certain provisions in your current estate plan might be outdated, or worse, detrimental to your wishes.

The following are highlights of the changes in the Tax Relief Act:

(1) Unified exemptions.  The law unifies the estate tax exemption (discussed above) with the lifetime gift tax exemption.  Currently, you may gift $13,000 per person per year without incurring any gift tax penalties.  If you gift more than this amount, you are allowed a lifetime gift tax exemption amount.  If you use up your lifetime gift tax exemption, you are also using up your estate tax exemption.  For example, if you gift 1 Million Dollars to one person over the $13,000, you have also decreased your estate tax exemption amount by 1 Million Dollars.

(2) Higher exemption.  The estate tax and lifetime gift tax exemption for 2011 and 2012 is increased from $1 million to $5 million.

(3) Portability.  For the first time, a surviving spouse may take the deceased spouses exemption amount, shelve it, and then use it at his or her own death.  In other words, the exemption amount from the first spouse to die is portable to the second spouse.  Before, the spouses would have to plan ahead with a “bypass trust” to ensure that they could take advantage of two exemptions.  The problem was that the surviving spouse was required to use the first exemption at the time of the deceased spouse’s death via the bypass trust.  Furthermore, bypass trusts have tight restrictions on what the surviving spouse can do with the assets inside the bypass trust.  At least for now, spouses have some flexibility in taking the deceased spouse’s exemption amount to be used later.  What this means is that it is possible to transfer 10 Million Dollars tax free.  Some commentators have indicated that this signals the death-knell of the bypass trust.  Such suggestions might be a little premature as Congress could change the law later to dissallow portability.  What this means for you is that you need an estate plan that has the flexibility of allowing you to use the portability if it exists, but to also use a bypass trust if it does not exist.

The new developments with regard to estate and gift taxes make it imperative that you have your current estate plan reviewed.  Our law firm can assist you in making any necessary changes to ensure that your estate plan has the flexibility that is required to adapt to not only the current laws, but any foreseeable changes that may occur.  Please contact our office today!